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January 21, 2011

Despite $35 Bn in AUM, Patrick Cunningham Is Still Striving: The Weekend Interview

For 41 years, Manning & Napier, the asset management firm based in Rochester, N.Y., has followed an investing process and built a culture where the intent is to “save the client, not save the business,” says CEO Patrick Cunningham. Despite having $35 billion in assets and pioneering the lifecycle fund approach to retirement planning, Cunningham and the employee-owned company’s 350 staff members have stuck to the culture forged by its founders, he said in a Jan. 18 interview with AdvisorOne. Specifically, co-founder Bill Manning’s guiding principle of always asking ‘What is the purpose for this money?’ continues to inform every aspect of the company’s approach. “We have absolute return woven” into the investing process “in a significant way,” Cunningham reports.

The company also has tax and estate planning attorneys on staff who help Manning & Napier’s clients by providing free second-opinion expert assistance and has written multiple white papers for advisors and plan sponsors on everything from how to pick a QDIA for a retirement plan to how to incorporate risk-based accounts like an SMA.

AdvisorOne: It seems that there’s been a significant change since the financial crisis in how advisors conduct due diligence on money managers, partly driven by clients’ concerns. Do you agree?

Cunningham: Clients are more risk averse, and annuities are more popular. Advisors are doing more due diligence on active managers, or they’re going in the opposite direction, using ETFs as the basis [for client portfolios]. There’s lots of pressure on advisors, but those two trends will continue.

AdvisorOne: What’s the Manning and Napier investing process like?

Cunningham: The firm is benchmark-agnostic. We start at zero and build from the ground up. At the end of 1999, for instance, we were very underweight on technology; it was a valuation issue for us. We’re team oriented with our 40 stock analysts, our 15 top-down ‘economists,’ our 15 fixed-income analysts and the people in our senior research group. We have no stars, no portfolio managers. Our analysts are industry specialists, not small-cap or large-cap. They come up with a five-year earnings projection, and then we

calculate a fair-market value which is our sell price. Part of out stock-picking is also doing write-ups on who’s going to lose, in addition to finding firms that can replicate their success in different geographical markets. We will only buy when the price is discounted to that fair-market value.

Our analysts’ compensation is primarily bonus, based on a positive return of a stock the analyst has recommended. Tell me how you're paid, and I’ll give you our job description.

AdvisorOne: What are your goals for Manning & Napier? [Cunningham joined the company in September 1992, but became CEO only in June 2010]

Cunningham: The last thing I’d say is ‘I want to get to $50 billion’ [in AUM]. Our goal is to improve the stickiness of those [$35 billion in] assets by helping clients reach their long-term goals. To mitigate a business usually measured by performance is to focus on relationships with clients [Manning & Napier’s clients are big retirement plan companies like Callan and Mercer, Cunningham says, while the advisor channel accounts for 5% to 10% of its business, which he hopes to grow].

There’s a higher degree of accountability now, but we think you can still make a reasonable living doing the right thing. We wear with pride the fiduciary badge. These advisors are very sophisticated, and the best advisors care more about your process than about whether you’ve got the hot investing hand. We also bring in a Big Three accounting firm to vet our investing process.

AdvisorOne: Can you comment on the proposed rule-making on lifecycle funds by the SEC and the Dept. of Labor?

Cunningham: We're students of lifecycle investing, and our approach is not simply to have a glide path, but a range along that path. We use active asset allocation in our lifestyle funds. More disclosure [as proposed by the SEC and DOL on lifestyle funds] is good, and while you could say it might be confusing to plan participants who may not even read it, plan sponsors and the advisors to those plans will read the extra disclosures and the record-keepers will have to communicate [those disclosures]. It's too bad, however, that lifecycle funds became the scapegoat for 401(k) plans. [Despite the publicity over their failures during 2009] that prompted Sen. Herb Kohl's investigation, the 2010 fund is back whole now.

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